Common Securities Law Issues to Manage for Transaction Attorneys

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Once an SEC investigation or action is underway, it is a one-way street, with the SEC controlling the speed and information along the way. Securities cases typically involve high stakes and sensitive matters that could derail more than a transaction. Here, I will share some issues to be aware of and manage for transaction and business attorneys.

Securities cases typically involve high stakes and sensitive matters. Securities claims present the risk of substantial damage awards and adverse publicity and may bear little relation to the true merits of the claims.


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The U.S. Securities and Exchange Commission (SEC) investigations stem from a range of actions such as routine examinations of new registrants to in-depth reviews of registrant affiliates. Investigations spin out of private lawsuits by investors seeking damages or state enforcement actions. Media reports, referrals from other government agencies and irregularities identified using market and trading surveillance technology can all result in inquiries.

Once the SEC starts digging, what they find may have little to no bearing on where they started. For example, a routine exam of a new registrant could uncover ownership of a real estate development company that raised money for commercial real estate projects through Regulation D offerings. The development company activities could open up the registrant to added scrutiny, an investigation or even federal court action alleging securities violations.

Regardless of how the SEC learns of potential violations of the securities laws, once an investigation or action is underway, it is a one-way street, with the SEC controlling the speed and information along the way. The results can morph into any number of detours, with the SEC pursuing inquiries of both an SEC registered company and any of its affiliates.


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These typically sensitive, complicated matters can disrupt business and upset due diligence efforts for transaction and business attorneys. When actions come in the form of a letter or subpoena from the SEC, keeping requests in perspective, anticipating risk, and knowing how to proceed can be critical.

SEC inquiry

Initial notifications from the SEC typically seek documents, testimony and interviews on a voluntary basis. If the party who has been requested to provide documents by the SEC is not a registrant, the matter is likely voluntary, and the party can refuse to produce documents.

A registrant receiving a voluntary request must produce the documents. Any stonewalling or delay in producing those documents can lead to the conversion of the examination or inquiry into a formal order for investigation, giving the SEC subpoena power to compel document production and sworn witness testimony.

SEC enforcement actions are initiated either in a federal district court or before an administrative law judge (ALJ). ALJs are appointed and compensated through the SEC, giving the ALJ significant homecourt advantage. This agency-appointed ALJ can stack the deck against defendants in proceedings, where the success rate of prosecution is exceedingly high within the SEC’s home court.


Computer Forensics

The district court system generally provides defendants with a fairer fight by virtue of the neutral Article III judge. Although the SEC’s success rate is lower in federal district court, potential success needs to be weighed against potential damage to reputation, shareholder support, stock price, and registration or licensure suspension or revocation resulting from a public lawsuit.

There are notable differences in the standards used and remedies available in both forums. Administrative proceedings are governed by SEC Rules of Practice. Appeals go to the Commission and can then be reviewed by a court. By comparison, judicial proceedings are governed by the Federal Rules of Civil Procedure and Federal Rules of Evidence. District courts provide a right to jury trial and appeals are taken to the appropriate U.S. Court of Appeals. The remedies available to defendants in both forums largely overlap. But the judicial system offers the Commission remedies including freezing of assets, restitution and damages related to investor losses, and the appointment of a receiver.

Recently, in Jarkesy v SEC, 34 F.4th 446 (5th Cir. 2022), the court reversed an SEC ALJ decision finding constitutional violations with the SEC’s use of ALJs in a fraud and damages case. The Fifth Circuit held that the use of an ALJ denied Jarkesy the right to a jury trial guaranteed by the Seventh Amendment.

The SEC’s decision was vacated, and the case remanded for further proceedings consistent with the appellate court’s opinion (see Jarkesy v. SEC: What is its potential impact?). The result may be that the SEC may be more apt to pursue civil penalties or claims of fraud to the district courts. Practitioners now should consider whether to seek judicial review of the Commission’s ability to even bring the case before ALJ, depending on the remedies the SEC is seeking.

Where issues arise

The SEC pursues a broad range of actions, often prioritized each year by the Commission based on where alleged violations of federal securities laws are occurring. In 2022, significant focus areas included private funds, environmental, social and governance investing, retail investors, security controls, emerging technologies and crypto-assets.

The SEC teases out various types of violations in a wide variety of ways against an extensive list of market participants. This includes broker-dealers, investment advisers, funds and pools, investment companies, and unregistered parties, particularly those raising money from private investors. Overwhelmingly, violations stem from the obligation to provide full information and not misrepresent information in connection with the offer and sale of a security. The most common violations are misrepresentations or omissions as part of an offer in the sale of securities, and violations of Sections 10(b) and 17(a).

Private party cooperation

The decision to cooperate with the SEC must be based on the specific facts and circumstances as well as scope and types of materials requested. Rarely will the recipients of a notice know the focus or extent of what the SEC is hunting. Most companies cooperate with even the most onerous requests, preferring not to get off on the wrong foot with an organization as powerful as the SEC. It may not be until the SEC is taking sworn testimony as part of their investigation that a defendant may develop an idea of the SEC’s concerns. At that late date, a company or individual who chose not to cooperate may find itself in the worst possible position to prevail.

Attorneys responding to the inquiries with their clients have the opportunity to ask the SEC for clarification in an effort to sort through what could be afoot. Although the SEC is under no obligation to confide to the company the focus of their investigation, this phone call and the requests themselves can provide an attorney with some insights into what the SEC is targeting.

After initiating an investigation, the SEC may issue a Wells Notice, which states that the SEC believes there has been a violation of the federal securities laws and cites which laws. This fairly nebulous, boilerplate notice recites statutory provisions that the SEC suspects have been violated without any factual description. The SEC may describe facts to support its Notice in a subsequent meeting or conference call that its staff believes give rise to the violations of securities laws.

Because the target of an investigation does not get to direct how an investigation proceeds, what information the SEC requests, or any subsequent action, responding to the Wells Notice is the first opportunity a client has to tell its side of the story. The response should take the form of a legal brief written by attorneys to point to facts and legal authority the Commission investigators may have missed.

Prior to responding, clients and lawyers should discuss the value proposition of the response. This includes isolating the particular issues that might get traction with the SEC and whether it makes sense to persuade the SEC not to bring action at all, effectively truncating or paring down the case, controlling the factors in play and influencing where the fight might go. Depending on the volume of documents and the type of violations and conduct at issue, it can be an expensive proposition to prepare a Wells response.

Client management

Client management is key to determining whether and when to settle an issue. Clients can get worked up over what started an investigation when they should be more concerned with how to handle the investigation. Once an investigation has started, it can take on a life of its own and go off in all kinds of directions.

Settling a Commission action is a fairly complicated affair. Consideration of any settlement offer must take into account potential private litigation and follow-on actions at the federal or state level. In some cases, fighting to the bitter end, and winning, can forestall private litigation. Settling early could give private investors a leg up on follow-on litigation, depending on the details of the settlement, the findings in the case, and whether a party has taken responsibility for securities violations.

Disclosing an SEC matter

Client questions about whether to disclose an investigation internally or publicly are common (see Disclosure or non-disclosure: Governmental Investigation of Securities-related Activity). Companies and individuals do not necessarily know how an SEC investigation will unfold or how it may be used against individuals and entities. Early disclosure sometimes allows companies to prepare and control its response to the disclosure, which may affect potential securities actions against them. It is a decision best directed by a securities attorney, who will be attentive to the specific circumstances and potential consequences inherent in disclosures of securities investigations and actions.

Often the answer to whether to disclose depends on how the investigation proceeds. At the inquiry level, disclosure may be unnecessarily damaging. At the point subpoenas are issued, disclosure may be advisable, even though it may not be legally required. Once the SEC takes action either in federal court or an ALJ proceeding, disclosure has probably become necessary.

This information is not intended as legal advice. Readers should seek specific legal advice before acting with regard to the matters addressed above.

Paul Vorndran

Paul Vorndran is a securities litigation and enforcement defense attorney with Jones & Keller in Denver. Paul defends individuals and entities in investigations and enforcement actions brought by the SEC, FINRA and state securities commissioners. He can be reached at [email protected].

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